The Mincer earnings function is the cornerstone of a large literature in empirical economics. This paper discusses the theoretical foundations of the Mincer model and examines the empirical support for it using data from Decennial Censuses and Current Population Surveys. While data from 1940 and 1950 Censuses provide some support for Mincer's model, data from later decades are inconsistent with it. We examine the importance of relaxing functional form assumptions in estimating internal rates of return to schooling and of accounting for taxes, tuition, nonlinearity in schooling, and nonseparability between schooling and work experience. Inferences about trends in rates of return to high school and college obtained from our more general model differ substantially from inferences drawn from estimates based on a Mincer earnings regression. Important differences also arise between cohort-based and cross-sectional estimates of the rate of return to schooling. In the recent period of rapid technological progress, widely used cross-sectional applications of the Mincer model produce dramatically biased estimates of cohort returns to schooling. We also examine the implications of accounting for uncertainty and agent expectation formation. Even when the static framework of Mincer is maintained, accounting for uncertainty substantially affects the return estimates. Considering the sequential resolution of uncertainty over time in a dynamic setting gives rise to option values, which fundamentally changes the analysis of schooling decisions. In the presence of sequential resolution of uncertainty and option values, the internal rate of return - a cornerstone of classical human capital theory - is not a useful guide to policy analysis.
In (nearly) all countries the government directly produces schooling at all levels from primary to tertiary-and yet economists lack a compelling model of why any government produces any schooling. This paper presents a simple model, with just four elements, that can explain the universal direct production of schooling. First, formal schooling jointly produces skills and beliefs. Second, both citizens and regimes (the individuals or groups that exercise state power) care directly about the beliefs the schools promote. Third, regimes act autonomously subject to some citizen control. Fourth, since the inculcation of beliefs cannot be externally assessed and is not easily monitored direct production is the only feasible way to control instruction in beliefs (Pritchett 2002). In a model with these four features if regimes and citizens disagree about beliefs-about who should legitimately rule, about the desirable economic system, about the justice of the distribution of wealth, about loyalty to nation (versus region, ethnicity, clan, kin), about religion, about political ideology-then regimes will directly produce schooling in order to control instruction in beliefs. This model not only predicts direct production of schooling by (nearly) all governments but it also explains other features of educational policy that are otherwise puzzling (e.g. the lack of mandates, bans on private education), produces reasonable comparative static predictions, proposes new solutions to puzzles in the economics of schooling, and, hopefully, orients the search for solutions to practical problems like expanding access and improving quality of education.
The key difference between signalling and human capital models is that signalling models allow firms to draw inferences about unobserved characteristics of workers. Those inferences can be based on the schooling or work experience of workers, or on direct measures of some aspects of job performance. Many recent empirical findings can be better explained by signalling models than by human capital theory. Given the explanatory power of signalling models, standard estimates of the social return to secondary schooling are in large part capturing differences in affective traits, such as perseverance, which were acquired either in primary school or at home. Copyright 1995 by American Economic Association.
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